Tensions over a nuclear-armed Iran continue to keep oil on the boil with Brent crude hovering around $125 a barrel. With no end in sight to the standoff between the West and Iran, India has its work cut out. Higher fuel prices and a poor electoral performance in key states have saddled the Congress-led UPA government with a political tinderbox at home, while it also is being asked to pick sides between old friends Iran and Israel.

On Friday, Indian Oil Minister Jaipal Reddy said India will continue to import crude oil from Iran so long as doing so will not break international laws.

New Delhi is walking a tightrope.

Trita Parsi, the founder and president of the Washington-based National Iranian Council, assesses Indiaís diplomatic performance so far and offers a view of how the U.S. can defuse the tension over Tehranís nuclear ambitions.

Mr. Parsi is the author of ďA Single Roll of the Dice: Obamaís Diplomacy With Iran.Ē

Edited excerpts:

India imports 80% of its petroleum needs and buys $12 billion of Iranian oil annually. How damaging to oil prices is Iranís saber-rattling?

The U.S. has been trying to get sanctions on Iran and what the Iranians want to do in response is hurt the West. And one of the ways to do that is through saber-rattling that gets oil prices to shoot up. The Iranian government benefits because itís an oil producer and exporter and the Western countries take a big hit because they are consumers. Obama takes a particularly big hit because higher petrol prices mean higher gas prices. And higher gas prices mean itís going to be more difficult to create jobs in the United States.

Can OPEC kingpin Saudi Arabia make up for the shortfall in Iranian oil production?

Iím not an expert on Saudi oil and their capacity to produce but what is clear is that whatever their capacity is, the markets donít seem to be convinced and petrol prices are shooting up.

Despite the Iran-Israel standoff, India is pressing ahead with its economic agenda with Tehran. Weíre looking at refurbishing the Chabahar port in Iran and we also managed to find a way around the Westís oil sanctions by making oil payments in rupees. How are these moves being perceived in Washington ó who India has great relations with ó and in Israel, from whom India buys its arms?

Both Israel and the United States are annoyed that throughout this period, India has managed to keep a neutral position and have good relations with all sides. At the same time India is such an important country that it has become difficult for the United States to increase its pressure on India too much. Obviously there will be some increased pressure but the question is how far the West can go on this issue. Iíve heard that the U.S. will now tell India that they view the relationship with Iran as ďoffensiveĒ which is a step higher than how it has been viewed in the past.

And how might that impact U.S.-India relations?

The question is how far the U.S. is willing to take this and it seems unlikely that the U.S. is willing to risk a conflict with India over this issue. At the same time how far is India willing to take this? Is India willing to forgo the Iranian market and Iranian energy in order to retain its position with the West? I feel the Indian governmentís calculation is that it feels it is completely unfair for the West, and the U.S. in particular, to put India in a position where it has to choose one friend over another. And some of Indiaís resistance is that it simply refuses to yield into such a pressure that perhaps smaller countries can succumb to, but for a rising power like India, it would be a bit embarrassing.

How are the Israelis viewing Indiaís position?

The Israelis have far less leverage on the Indians than this. And they have tried for quite some time to turn India, but the relationship that Israel has with India is of such value that it is not going to be sacrificed over a different perspective on Iran. The Israelis would rather put more pressure on the U.S. to put more pressure on India rather than doing it directly.

Indian authorities had earlier refused to implicate Iran for the Feb. 13 bomb attack on an Israeli diplomatís wifeís car. But now, the investigations in New Delhi are turned towards the Iranians and to people with ties to Iran. Does that change the India-Iran dynamic in the conversation now?

Hereís two things that are happening right now thatís pulling India in different directions. On the one hand, thereís the decision by the Indian police to go after the suspects with warrants (in the Israeli diplomatís attack case). And itís a very serious matter for the Indians if Iranians are engaged in terrorism or assassinations on Indian soil. Itís unacceptable to India. Itís saddling them with tensions and works to the advantage of those who want to see Iran-India ties deteriorate. On the other hand, the serious deterioration of the situation in Afghanistan and Pakistanís role is causing worry. Itís quite the balancing act for the Indians.

Israeli Prime Minister Benjamin Netanyahu met with U.S. President Obama in Washington this month and said Israel has to be the ďmaster of its own fate.Ē What options is Israel pursuing right now and how realistic is an Israeli military strike on Iran?

The main option that Israel is hoping for right now is that the United States commits itself or undertakes a military operation against Iranís nuclear facility. There is an implicit threat that the Israelis would do it themselves. But itís not a threat that is very credible because the Israelis have been making it for 10 years. The Israelis could be so foolish to do it themselves but it would have several negative consequences. One being it would really create a lot of tension between the U.S. and Israel because the Israelis are simply not capable of doing it successfully, and as a result in the view of the U.S. it would just matters worse.

Itís striking that the U.S. Chairman of the Joint Chiefs of Staff Gen. Martin Dempsey and the Secretary of Defense Leon Pannetta seem to think attacking Iran at this point would be a bad idea. So, how does Washington hope to reconcile the differences between what politicians say and what the military thinks is viable?

The American option as President Obama laid out is that they want to continue doing diplomacy (with Iran.) I think that is the right approach. The effort needs to be more dedicated and sustainable than what the Obama administration has managed to muster so far. But the military is really concerned about being rushed into a confrontation with Iran because at the end of the day there really isnít a military solution to this. Because itís a very vague operation with very vague objectives, how will you determine whether it has been a success or not? Most likely, the Iranians will reconstitute the nuclear program or probably push more aggressively towards building a weapon. The U.S. military is not keen on the Israeli idea of going and bombing Iran every two or three years. Thatís not something the U.S. is interested inÖ mindful of the tremendous destabilizing impact that would have on the region and on the energy markets.

The West has imposed sanctions on Iran. How effective are they in pushing Iran to come to the table to talk?

I donít think the sanctions have had much to do with that. Frankly because Iranian offers to come and talk on the 20% (enriched nuclear fuel) issue were already existing last summer.

What the U.S. wants, of course, is that the Iranians would commit themselves to the agenda that the P5-plus-1 (the five permanent members of the UN Security Council plus Germany) have put together and now it seems the Iranians have done so. The U.S. may think itís because of sanctions, but the Iranians may feel we have now mastered the 20% enrichment and theyíve built their own fuel pads and as a result they may feel theyíre in a stronger position and therefore are ready to negotiate.

The Supreme Leader Ayatollah Ali Khameneiís loyalists won a majority in the parliamentary elections this month Ė making Ahmadinejad a lame duck president. Is this victory likely to have any impact on Iranís foreign policy and help cool oil prices?

I think 2012 is a crucial year. Itís critical to make sure tensions reduce because of the elections cycle (in the U.S. and Israel.) But if we manage to make sure tensions are not increased during this periodÖ there is an opportunity to get this issue resolved diplomatically.